Download Railroads and the Brazilian Economy Before 1914

Railroads and the Brazilian Economy Before 1914
William
R. Summerhill•
Department
ofHistory
University
ofCali•rn& LosAngeks
Althoughthe railroadwasthe mostcelebrated
technological
innovation
of the nineteenthcentury,its impactvariedconsiderably
dependingon the
settinginto whichit wasintroduced.
For Brazil,historians
often claimthat
railroaddevelopment
intensified
dependence
on foreignproductand capital
marketsin the secondhalf of the nineteenthcentury.Accordingto this
scenario,
railroadenterprises,
intended
mainlyto caxryplantation
cropsto port,
benefitedforeigninvestorsand export agriculture
at the expenseof the
economyasa whole.
Basedon an extensivearrayof new evidenceand cliometricmethods,
thisstudy'sfindingsare sharplyat oddswith standing
conclusions
aboutthe
impact of nineteenth-century
railroaddevelopmentin Brazil. It examines
modernBrazil'sfirstwaveof transport
improvements,
whichbeganwith the
earliest construction of railroads in the 1850s and continued until motor
vehiclesbeganto supplantsteamlocomotionafter 1900.The railroadheld
profoundconsequences
for theeconomy,
but not thoseheretofore
stressed
in
the historiography.
Relyingheavilyon risk-reducing
subsidies,
foreigncapital,
and governmentregulation,Brazil capturedsubstantial
gainsfrom the iron
horse.Indeed,therailroadprovedindispensable
to Brazil'semergence
around
1900asoneof thefastestgrowingeconomies
in theWesternworld.
This studyaddresses
threemainquestions.
First,whatdirecteffectsdid
the railroadhaveon the economy?
Second,what differencedid it makethat
railroads
were oftenownedby foreigners
and regulated
by the government?
And third,whatbroadersetof outcomes
mightbe attributed
to the courseof
railroad
development
in Brazil?
In posing
answers
to thesequestions
I drewon
a varietyof sources,
including
the operating
andfinancial
reportsof railroad
companies
archivedin Londonand throughout
Brazil,the contemporary
commercial
press,andrailroadcensuses
andstudies
of Brazilian
government
ministriesfrom the 1850sthrough1913. Thesematerialspermittedthe
construction
of originaldata setson pre-railtransportcosts,government
• Thissummary
captures
themainthemes
of mydissertation,
completed
in 1995under
the direction
of Stephen
Haber,GavinWright,andAvnerGreif,in the Department
of
Historyat Stanford
University.
I gratefully
acknowledge
thesupport
of theU.S.Department
of Education
Fulbdght-Hays
programandtheJointCommittee.
on LatinAmedcanStudies
of the American Council of Learned Societies and the Social Science Research Council.
BUSINESSAND ECONOMIC HISTORY, Volume
Twenty-six,
no.2,Winter1997.
Copyright
¸1997 bytheBusiness
HistoryConference.
ISSN0894-6825.
318
RAILROADS AND THE BRAZILIAN ECONOMY BEFORE 1914/319
subsidies,
and the operations
and financial
performance
of Brazil'smajor
railroads.
Thesedataprovided
the empirical
basefor an examination
of the
scopeandmagnitude
of therailroad's
principal
directandindirect
linkages
to
theeconomy.
In Braziltherailroad's
principal
consequences
maybesummed
upin the
following
terms.
Theforward
linkage
to transport-using
activities
waslarge,and
theimpactof cheaptransport
ontheinternal
economy
quickly
surpassed
that
of the exportsector.
However,backward
linkages
to activities
whoseoutput
the railroadmightotherwise
haveusedintensively,
especially
industry,
were
weak.Nonetheless,
the employment
andincomeeffectsthat wereexported
abroad
weresmall.Theopportunity
costsof foreignfinance
for thedevelopmentof domestic
capital
markets
werelow.Thestructural
impactof railroads
in Brazildifferedmarkedly
fromthe caricature
of a dependent
andunderdeveloping
LatinAmerican
economy.
The broaderinstitutional
consequences,
particularly
regarding
thewayinwhichtherailroad
transformed
theroleof the
statein theeconomy,
werepositive
in the shortrun,but likelynegative
in the
longertenn.
Serious
railroaddevelopment
in Brazilbeganrelatively
late.An uncertain
politicalsituation
andpoorlydeveloped
capitalmarkets
handicapped
attempts
to buildrailroadsbefore1850.Pressurefrom the land-and slave-owning
elite
on government
to improvetransportincreased
throughmid-century.
The
government
mediated
thesedemands
by guaranteeing
minimumdividend
paymentsto investors
in the desired
projects.
Whilenativerailroadentrepreneurs
andprojectpromoters
oftenshared
broaddevelopmental
concerns,
thebulkof
politicalsupportfor the policycamefromplantersseeking
to enhance
their
personalwealth.Dividendguarantees
from the government
harmonized
the
goalsof theplanterclass
withthedesireof raikoadinvestors
to avoidexcessive
risk.Althoughthenumberof government-subsidized
railroads
increased
markedlybeginning
in the 1870s,muchof Brazilremained
outside
thereachof the
railroadby 1913.Giventhereadyavailability
of coastwise
shipping,
mostlines
werebuiltto linkportsto theinterior.Combined
withthedistributive
character
of dividendguarantees
enacted
by the Parliament,
sucha scattered
patternof
subsidy
and construction
revealedthat railroaddevelopment
proceeded
with
litdeconsideration
givento establishing
a large,national
network.
However, the absenceof an integratedrailroadgrid in no way
attenuated
theimpactof thenewmodeof transport
for Brazil.In fact,railroads
in Brazilwereremarkable
for the verylargedirectbenefitstheygenerated.
In
termsof thesegains,railroadsprovedto be tremendously
importantfor
economicgrowth.Considerthe direct benefitsobtainedon freight and
passenger
services.
In contrastto the UnitedStates,Brazillackedcheap
substitutes
for railroads.
Riverconditions
in mostof thecountryhindered
longdistance
shipment.
Most freightandpassengers
movedoverhillyterrain,in
tropicalconditions,
on roadsthatweredifficultto maintain.
By supplanting
mule trains,carts,and stagecoaches
on eventhe best roads,the railroad
dramatically
reduced
thecostof transporting
bothpassengers
andfreight.The
precipitous
fallin overland
transport
charges
extended
thefeasible
marginof
320 / WILLIAM R. SUMMER.HILL
agriculture,
andintegrated
productandlabormarkets.
Brazilian
railroads
both
released
resources
to existingactivities
in the economyand stimulated
the
creation of new ones.
Estimates
of the railroad's
directsocialsavings
reveala largepositive
impacton thelevelof national
income.The forwardlinkage
to transport-using
activities
wasexceptionally
strong.
To inferthemagnitude
of thegainsafforded
by railroads,I conducteda counterfactual
exercisethat measuredthe
hypothetical
costsof shutting
downtherailroadsector
in 1913.The costsof
relying
onthenextbestalternative
- cartsandmulescompeting
overimproved
roads- providea staticapproximation
of thebenefitscreated
by therailroad's
cheaptransport
sexyices.
At theupperboundmorethan30%of Brazil's
gross
domestic
productin 1913wasdueto theresources
savedon shipping
freight.
Evenundermorerestrictive
assumptions,
thefreightsocialsavings
werestillat
least10% of GDP. The benefitsfrom passenger
travel,thoughappreciable,
weremoremodest.If first-class
passengers
had shiftedto stagecoaches,
and
second-class
passengers
hadwalked,thecoststo theeconomy
wouldhavebeen
small.Together,
passenger
andfreightbenefits
account
for a largeportionof
the econoroy's
gainsbetween1885,when the railroadsectorbeganits first
roundof veryrapidgrowth,and1913.
While the railroad'sforwardlinkagewas powerful,strongbackward
linkages
wereconspicuously
absent.
In contrast
to the largegainsfromlower
transportcosts,the quantityof Brazilianmanufacturing
outputconsumed
by
railroads
wassmall.Demands
for coal,rails,androllingstockweremetlargely
by overseas
suppliers.
There was little linkagefrom the railroadsectorto
producersof key inputs,especially
industry.Instead,there was backward
"leakage"
of indirectbenefitsabroad.Brazilexported
incomeandemployment
effects,chieflyto GreatBritain.For manyhistorians,
it wastheverysuccess
of
railroads
in reducing
transport
coststhatledto the failureto createbackward
linkages.
In thisview,therulingclass's
resolute
ambitionto obtainrailroads
as
quicklyaspossible,
combined
withtheabsence
of policies
thatforgedlinkages
to coal mining and metal production,meant that railroaddevelopment
constituted
a foregone
opportunity
to industrialize.
However,thisviewfailsto
squarewith evidenceon the role of railroads
in the industrialization
of the
more advanced economies, or with the obstaclesto modern iron and steel
production
in Brazil.In the UnitedStates,
for example,
railroadconstruction
andoperation
tappedextantmanufacturing
activities
thatdepended
onlypartly
on thedemands
of therailroadsector.
Brazil,by contrast,
hadweakbackward
linkages
because
railroaddevelopment
camewellbeforethe riseof domestic
industry.Moreover,directoutlayson foreignrailroadinputswereminuscule
relativeto thebenefits
of cheaptransport,
comingto, at most,lessthan0.5%
of GDP in 1913.The opportunity
costsof thisreliance
on foreigninputswere
small.Lackingore andcoaldeposks
of sufficient
qualityto sustain
a modern
iron and steelindustry
in the nineteenth
century,
hadBrazilpursued
protectionistpoliciesdesignedto forgebackwardlinkages,railroaddevelopment
would have groundto a halt in the late 1800s,therebyinstitutionalizing
backwardness.
RAILROADS AND THE BRAZILIAN ECONOMY BEFORE 1914/321
In termsof the unbalanced
overallconsequences
of railroads,Brazil
bearsa strongresemblance
to otherrelativelybackwardeconomies,
suchas
Mexicoand Spain.However,the distribution
of directgainsfrom railroads
differedmarkedlyfromthatin Mexico,wherecheaptransport
anddiscriminatoryfreightratesfavoredforeign-owned
exportactivities.
Bycontrast,
Brazilian
railroads,
evenwhenforeign-owned,
serveda growingandincreasingly
diverse
economycharacterized
by Brazilian-owned
industry,andnative-Brazilian
and
immigrant farming. Governmentregulationensuredthat consumersof
transportservices
reapedthe bulkof the railroad's
benefits,so that transport
savings
accruedprimarilyto Brazilians.
The government
continuously
pushed
railroadrates down, and held them especially
low for agricultural
goods
producedand consumeddomestically.
Foreign-owned
railroadcompanies
earnedcompetitiveprofits,but rarelymuchmore than that. Brazilian-owned
railroadswere betterat opposingdownwardpressure
on rates,and earned
slightlyhigherprofits. Both British-owned
and Brazilian-owned
railroads
receivedsomeexcesssubsidies,
but the lossesto the economyfrom this
extravagance
weresmall.Especially
lowratesondomestic-use
goods,mandated
by government,
fostered
an expanding
domestic
market.Overtimetherelative
shareof exports
in totalrailroad
freightdeclined.
Sodidtheshareof exports
in
the economy's
overalloutputmix. The benefitsthat railroadsbestowedon
Brazilaccrued
increasingly
to thedomestic-use
sectorof theeconomy,
andnot
to theexportsectoror foreigners.
Government
policytowardrailroads
helped
to shifttheeconomy's
trajectory
dramatically
upward,andmovedit awayfrom
theexport"bias"of theearlynineteenth
centmy.
Beyondtheir overt impactBrazilianrailroadsalsocreatedlessvisible
benefitsand costs.The railroad's
interaction
with the institutional
setting
createdunanticipated
consequences
whoseimplications
for economic
perfor-
mancedefythe staticmeasures
of linkages.
Theseencompass
somebroader
effectsof the railroadfor the long-runtrajectory
of Brazilian
development.
Firstis the connection
between
railroads
andinternalbarriers
to trade.By
integrating
product
markets
therailroad
elLminated
natural
protection
formany
agricultural
producers.
Brazilianpoliticalorganization
facilitatedthe rise of
internaltariffsin the late nineteenth
century.
Theseprevented
the railroad's
gainsfrombeingevenhigherthantheywere.Protectionist
barriers
offsetsome
transport-cost
reductions
on someproducts
in someregions,
andconcentrated
themin others,
thuslikelyworsening
regional
andclass
inequalities.
Rapidrailroad
development
alsoaltered
thesocial
andpolitical
mapof
Brazil.The patternof railroad
construction
andsubsidy
accelerated
political
divisions
overtheinstitution
of slavery,
contributing
to thestrengthening
of
politicalsupportfor slavery
in thecenter-south
by increasing
thedemandfor
slaves,
andweakening
k everywhere
else.The regionalredistribution
of the
slavepopulationin the earlydecadesof railroaddevelopment
aidedin
undermining
the statusquo supporting
slavery
in Parliament.
The railroad's
opening
of a fertilenewfrontierin S3oPauloattracted
immigrant
laborfrom
southern
Europe,heralding
boththe onsetof moderneconomic
growthand
compounding
starkregional
disparities
in incomeandwealth.
322 / WILLIAM R. SUMMERHILL
Railroaddevelopment
furtherpromotedthe formationof an important
new classof professionals
in both the publicand privatesectors.
Although
foreigninvestmentand stateownershipremainedprominent,severalof the
countty'slargestand most successful
railroadswere ownedby joint-stock
companies
organized
withinBrazil.The imperatives
of modemproduction
and
coordination
strengthened
nativeentrepreneurship
andbusiness
organization.
At the sametime, stateownershipof railroadsexpanded.In governmentowned railroads the dictates of effective administration
created a cadre of
professional
staff,managers,
andplanners
in thepublicsector.
And theneedto
monitorthe newindustry,especially
the foreignfirmsinvolvedin it, createda
shrewdand savvygroup of regulatorsand railroadexperts.Becauseless
informationis available
on theseeffects,gauging
theirimpactin quantifiable
termsis not possible.
Nonetheless,
theymaywellbe no lessimportantin the
longtermthantheobservable
consequences
described
earlier.
The studyof the railroad's
principallinkagesin Brazilillustrates
the
myriadconsequences
of transport
improvements
forthetransition
to improved
economic
growth.The resultsof thisstudyalsocallinto questionprevailing
assumptions
andgeneralizations
abouttherolesof foreigninvestment,
andthe
state,in Latin Americaneconomicdevelopment.
In the Braziliancase,the
claimsaboutthe consequences
of railroaddevelopment
foundin dependency
interpretations
now appearexaggerated,
at best.Whenconsidered
withinthe
confinesof conventional
economic
analysis,
the railroad's
accomplishment
in
Brazilwassubstantial.
The government
subsidized
andregulated
railroadsto
reducethe burdenof hightransport
costsfor a ruralelitethat specialized
in
exportagriculture.
Foreigners
invested
in thoserailroads
because
theyfound
theriskstolerable
andbelieved
theystooda chance
of receiving
goodprofits.
Thoughbuilt usingforeigncapitalto link plantations
to port, the railroads
ultimatelyregisteredlarge gains for domesticmarketsand creatednew
opportunities
for immigration
and industry.Early railroadenterprises
also
launched
equityon thecountty's
leading
stockexchanges,
aidingin theriseof
modemcapitalmarketsin Brazil.
Thoughtherailroad's
rolein thetransition
to modemeconomic
growth
canno longerbe in doubt,in thelongertermtheimpactof anytechnological
innovationis alwayssubjectto question.In Brazil,railroaddevelopment
increased
the retumfromlobbyingfor govemment
intervention
by private
entrepreneurs.
Thedemonstrable
effects
of thegovernment's
heavyhandin the
economy
doubtless
contributed
to thegrowthof stateintervention
in economic
affaksmoregenerally,
leadingto marketinterventions
that wereof dubious
valueat best,and outrightdistortingand costlyat worst.To the extentthat
railroads
reduced
transport
costs,
theymaybe credited
withboosting
thelevel
of economicactivitybefore1914.However,to the extentthat the broader
process
of railroaddevelopment
contributed
to a bloatedgovernment
sector
andinward-looking
policies
afterWorldWar I, therailroad's
contribution
may
yetproveculpable
in equaldegree.